Generally, the purpose of insurance is to distribute the costs of the potential risks of a number of individual persons or companies over a large “pool” of such persons or companies. The insurer indemnifies each insured against a limited level of loss from a specified risk or risks. In return, each insured pays a “premium”, the premiums being pooled and invested to provide funds to pay for settlements of claims, when and if necessary. The insurer uses historical data, financial information, statistics, and information from other sources to gauge the amount of premiums paid by each insured against the aggregate losses of the pool of insureds. There are also regulatory aspects to setting premium rates. If an insurer's income from premiums exceeds payouts for claims, the insurer makes a profit. However, in a competitive insurance market, an insurer must limit premiums charged to the minimums required to cover any claims, overhead, and a modest profit. Thus, it is advantageous to an insurer to assess, as accurately as possible, the frequency and severity of any risks which it insures against and to charge premiums closely gauged to the probable payout which may be required.
Historically, insurers have tended to approach the setting of premiums from a consideration of overall claim payouts distributed, along with administrative overhead, over the total number of insureds. Risks are grouped according to characteristics in common, and statistics regarding demographics, risk exposure modifying behavior and activities, claim settlements, court rulings, actual claim payouts, and other factors are recorded over time and analyzed. Factors which correlate with increased or decreased claims payouts are identified and applied accordingly to the premium rate structure. In general, the insurance industry is fairly successful in most coverage areas, in that insurance underwriting is profitable to many insurance companies and regarded as beneficial to many insureds.
An area in which traditional approaches to risk assessment often fail is in coverage of new industries or in developing new insurance “products” where there is little or no history to analyze. For example, there is currently a proliferation of businesses and individuals engaged in developing, and consulting in relation to, all manner of computer applications, including websites and web-based business methods. In addition to the types of risks which face all businesses, many of these computer application developers face additional risks which have been traditionally associated with medical and legal practitioners, such as malpractice or “errors and omissions” risks. The rapidly expanding and changing nature of the computer consulting industry and the types of services performed and the changing nature of risks encountered, make it difficult to rely primarily on historical data to assess the risks encountered in the industry, and to make informed underwriting decisions. What is needed is a method for assessing risks associated with various activities, including the operation of businesses, which can more accurately characterize such risks, even without large amounts of historical data, to enable a determination of which risks to cover and those to decline, as well as the costs for such coverage.